Getting Ahead of Sector Rotation

Ed Ponsi

Right now, stocks are on fire. That's especially true of stocks listed on the Nasdaq 100, which has reached three all-time highs during the first week of July. 

Check out this chart, which measures the performance of the three major indices since the March 23rd bottom: the Nasdaq 100 (green), the S&P 500 (red), and the Dow Jones Industrial Average (blue). 

Notice how the Nasdaq has become detached from the rest of the market. 

comparison

The Nasdaq includes the hottest names on the planet, like Tesla, up 232% year to date, and Netflix, which has gained 52% so far this year. 

The problem is, if you were to remove a handful of high-flying stocks, the Nasdaq isn't nearly as strong as it appears to be right now. 

According to Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, the top ten performers on the Nasdaq account for 90% of the index's gains this year. In fact, 73% of the Nasdaq's gains can be attributed to just 5 stocks 

Check out the chart in this tweet from Sonders:

This means that the Nasdaq is currently propped up by just a handful of high-flying stocks. Does it also mean that it's time to get out?

No. Nobody makes any money by panicking, and it makes no sense to bail out while central banks are pumping unlimited liquidity. 

What we can do is get ahead of the inevitable rotation from the stocks everyone is buying right now to the ones nobody is talking about at the moment. 

That's not a move that should be made in one shot. For example, an investor could take 10% to 20% of Nasdaq positions off the table, and roll the proceeds into sectors like retail, pharmaceutical, and manufacturing. 

This plan allows for continued exposure to the hottest stocks around, while simultaneously moving toward the exit.